Wal-Mart's Path to Power in India Hits Its Limits: The Lawyers

Wal-Mart had big plans to expand in India, with its sights set on becoming the country's top retailer by 2015. But the WSJ's Megha Bahree tells Mariko Sanchanta how licensing issues are preventing the U.S. retailer from hitting its targets.

MUMBAI—Three years ago Wal-Mart Stores Inc.WMT-0.25% set out to be India's top retailer by 2015. The business plan was called Project Jai Ho, a Hindi phrase meaning "let there be victory."

Today, Wal-Mart's advance on India is barely moving.

The company opened just five wholesale stores in the country last year—well below the 22 planned. This year, Wal-Mart plans to open eight locations, a person familiar with the company's plans said.

Part of the reason lies in what people in the industry say is India's labyrinthine process for developing commercial real estate and operating stores. But one of the biggest reasons has been a compliance crackdown at Wal-Mart.

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A Bharti Walmart wholesale store in Zirakpur, India.
Bloomberg News

The Bentonville, Ark., company disclosed in November that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act, an antibribery law, in India, Mexico and other countries. The company hasn't been charged.

Since that internal probe began, Wal-Mart says it has stepped up efforts to keep partners and employees in line with U.S. and Indian laws. Running people through those hoops has slowed its expansion, the company says.

Wal-Mart's international operations are driving its overall growth. The company's sales rose 5% to $466 billion last year, with sales in its international division up 7.4% to $135 billion. However, the U.S. stores still account for a disproportionate share of Wal-Mart's operating income.

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In India, the retailer is well behind its modest goal of opening eight outlets this year; it last opened a store in the country in October. Wal-Mart has been operating wholesale stores in the country since 2009 and has 20 now. The company plans to open supermarkets in two years, after the government in September opened up foreign investment in such stores.

"As we develop and introduce enhanced procedures for obtaining licenses, there have been some temporary delays in store openings," a Wal-Mart India spokeswoman said. "We are committed to doing things the right way, every day."

To that end, Wal-Mart in the past several months has enlisted a phalanx of lawyers from a U.S. firm to develop compliance procedures and train employees in India. The company also has begun requiring its Indian landlords to attest that they haven't greased any government palms.

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Developing and operating stores in India is complicated, even for locals. Dozens of permits and licenses are required from various agencies down to the municipal level, and businesspeople in various industries say they commonly pay bribes to move projects along.

In the southern state of Tamil Nadu, piles of bricks and mounds of weed-ridden soil at a halted project attest to Wal-Mart's hurdles and frustrated plans.

In September 2011 Wal-Mart approached a developer with an eye toward building a wholesale store in the state. Within three months they had signed a contract saying the developer would build and then lease Wal-Mart a building for a wholesale store on a four-acre plot.

The developer told Wal-Mart it would take up to nine months to get the permits needed to begin construction and an additional year to build the store, a person familiar with the matter said, meaning it would be almost two years before the store could open. But Wal-Mart wanted the store to be ready for business within 12 months, the person said.

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Eager to start earning rent and recouping his investment, the developer started construction soon after, even though he didn't have the required permits, the person said.

In December the developer received a notice, reviewed by The Wall Street Journal, from a municipal agency ordering a halt to construction because of the missing permits. In February government officials sealed the site. Rows of metal containers and a half-built water tank sit hidden from public view behind a wall. Steel rods poke out of masonry.

"We are committed to complying with all laws and regulations and are in the process of implementing a number of specific, concrete actions to strengthen our compliance program in India," the Wal-Mart spokeswoman said. She addressed company policy generally for this article but didn't comment on specific incidents.

Licensing requirements also get thorny for companies throughout India, which requires separate permission for some individual types of produce. In the southern cities of Bangalore and Mysore, Wal-Mart partner Bharti Enterprises Ltd. in October opened retail stores without having licenses for rice, lentils, fruits and vegetables, a Bharti executive said. The store had to remove the items from shelves and has refiled license applications. Bharti shares some administrative functions with the U.S. company.

"We are in the process of implementing additional controls for our new store permit-and-licensing program to ensure the process is handled appropriately and in full compliance with all laws and regulations," the Wal-Mart spokeswoman said.

Wal-Mart's own policies sometimes have been circumvented as well, said current and former employees who have observed the practice.

Under company procedure, according to current and former employees, a team in India identifies potential sites for new stores and presents them to a real-estate committee for the country, several people familiar with the company's practice said. That committee's approvals are then sent to a similar panel for Asia, which, in turn, seeks the sanction of Wal-Mart's international real-estate committee in Arkansas, which includes company CEO Mike Duke. The entire process can take around 45 days before a contract can be signed and work can begin.

But the India team, in a rush to open stores, on several occasions started work on sites as soon as it got the nod from the India committee, according to people who said they had observed the practice.

To strengthen compliance, Wal-Mart in July brought in U.S. law firm Greenberg Traurig LLP and auditing firm KPMG LLP, the Wal-Mart spokeswoman said. The firms have developed compliance procedures and provided training to nearly 1,700 Wal-Mart employees in India. The two firms also perform due diligence on the company's partners and suppliers in India.

J.R. Wildman, an assistant general counsel at Wal-Mart in the U.S., worked in the company's India headquarters from last July to February to set up procedures for complying with the FCPA, which prohibits U.S. companies from paying bribes to foreign officials.

Wal-Mart now asks each landlord to answer a five-page questionnaire stating that it won't give anything of value or make a bribe to any government official or political party to gain a business advantage.

Some landlords said a clause allowing Wal-Mart to audit any of their businesses is particularly objectionable because it goes beyond the transactions that directly involve the U.S. company. Landlords also have to complete a 25-page questionnaire on any unit doing business with the U.S. company.

Reporting lines have changed since February, as well, when the heads of legal, finance, FCPA and compliance began reporting to department heads for Asia and the U.S. They previously reported to Wal-Mart India chief Raj Jain.

Wal-Mart said the company changed its reporting structure to centralize control. Mr. Jain wasn't available for comment.

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